Fiscal Rules and the Procyclicality of Fiscal Policy in the Developing World

Author/Editor:

Elva Bova ; Nathalie Carcenac ; Martine Guerguil

Publication Date:

July 10, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper documents the spread of fiscal rules in the developing world and investigates the relation between fiscal rules and procyclical fiscal policy. We find that, since the early 2000s, developing countries outnumbered advanced economies as users of fiscal rules. Rules were adopted either as part of the toolkit to join currency unions or to strengthen fiscal frameworks during and after large stabilization and policy reform episodes. The paper also finds that the greater use of fiscal rules has not shielded these countries from procyclicality, since fiscal policy remains procyclical following the adoption of a fiscal rule. We find partial evidence that some features of “second generation” rules, such as the use of cyclically-adjusted targets, well-defined escape clauses, together with stronger legal and enforcement arrangements, may be associated with less procyclicality.

Series:

Working Paper No. 2014/122

Subject:

Expenditure Financial sector policy and analysis Fiscal policy Fiscal rules Fiscal stance Procyclicality

English

Publication Date:

July 10, 2014

ISBN/ISSN:

9781498305525/1018-5941

Stock No:

WPIEA2014122

Pages:

27

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